By Ron Hirsch, Founder and Chief Strategy Adviser of Title3Funds.
The coronavirus pandemic will likely be one of the most defining events of the 21st century just as World War II was for the 1900s. Beyond the immediate health and economic impacts, we will see permanent cultural changes take place. Already remote work, virtual conferences, and straight-to-streaming movie releases have become the new normal, but the sobering reality is that millions of people have lost their jobs and are now seeking alternative sources of future income. This challenging time has led to a growing interest in online investments to such an extent that online investing very well be considered one of America’s new favorite pastimes.
Finding a Silver Lining in Innovation and Entrepreneurship
The immediate economic impacts of COVID-19 have been staggering. Record numbers of unemployment claims have been filed with an estimated 23 million people on unemployment programs at its peak. The US economy suffered the biggest contraction in its history in the second quarter of 2020, plunging the country into recession. McKinsey & Company estimates that many sectors, such as entertainment, food services and education, may not recover until 2025 or later.
Given the likelihood of a slow recovery across many industry verticals, this period of American history will give rise to a new generation of entrepreneurs and innovative startups. In fact, it is the creativity and wherewithal of people with ideas that we are depending on to ultimately pull us out of this coronavirus recession. Now more than ever, we are in need of solutions to the challenges COVID-19 has produced across industries, including travel, hospitality, food, supply chain, sustainability, education, and entertainment. We’ve also seen extraordinary growth of established companies like Zoom for virtual conferencing, Peloton for at-home exercise, as well as DoorDash and Drizly for food and beverage delivery. Investors who predicted the success of these companies are doing extraordinarily well right now. However, everyday people have much more to gain by learning how to make investments in early-stage businesses that have not yet gone public.
Equity investments in private companies, which generally have the most favorable terms for investors over stocks and other financial instruments, were only available to high-net worth individuals until the JOBS Act went into effect in 2016. Title III of the JOBS Act gave everyday people the ability to invest in private companies for the first time, effectively opening up the entirely new asset class of crowdfunded investments to the average Joe and Jane, not just the wealthy. By empowering everyday people to become owners rather than solely consumers, we will give the economy the best chance of recovering and even exceeding pre-pandemic norms.
Especially when people invest in new startups and companies that have the greatest growth potential, everyone wins. Entrepreneurs are supported with crowdfunded capital in growing their companies, creating jobs, and contributing to the nation’s GDP. At the same time, retail investors increase the chances of winning big when these companies go public five to seven years down the road or sooner.
The SEC is doing its part amidst the COVID-19 pandemic to help businesses gain the funding they need by easing restrictions and costs associated with crowdfunded raises temporarily in order to speed-up the process of acquiring funds. Additionally, much-anticipated new rules will go into effect that will allow businesses to raise up to $5 million in one year instead of being limited to $1.07 million. Furthermore, individual investment caps will be revised to allow for more flexibility based on income and net worth.
Young People Have the Power to Enact Real Change
As always, the future is in the hands of young people. Millennials and GenZ are incredibly savvy in their use of online platforms and applications, and they are already bolstering the online investment ecosystem with their avid participation. Since 2016, online stock trading platform Robinhood has grown from 1 million to over 10 million users—an extraordinary expansion that can primarily be attributed to millennials. Noticing the demand for online investment offerings, top brokerage firms like Charles Schwab, TD Ameritrade, E-Trade Financial, and Fidelity have eliminated trade commissions and added fractional share ownership in order to compete with Robinhood.
Crowdfunded investments have greater potential to garner rewards over the long-term, but, given their nascence in 2016, the benefits of this asset class are still relatively unknown (Disclosure: my company, Title3Funds, is a crowdfunded investments platform). I predict that just as Robinhood rocketed to the forefront of the national conversation during Q1 and Q2 of this year, we will see a similar surge in participation in the crowdfunded investment asset class before the end of 2020 and beyond.